Question 1

In convertible bonds, the value of the common stock price upon immediate conversion is the

Accepted Answer

A) Put-call parity price. 
B) Conversion parity price. 
C) Cash equivalent price. 
D) Convertible price. 
E) Redemption price. 
A) Put-call parity price. 
B) Conversion parity price. 
C) Cash equivalent price. 
D) Convertible price. 
E) Redemption price. B

Question 2

In an interest rate swap, the fixed rate payer profits if interest rates fall.

Accepted Answer

A) True 
 B)False  False

Question 3

The writer of a ____ agreement makes settlement payments when LIBOR is greater than the striking rate of the agreement.

Accepted Answer

A) Swap 
B) Cap 
C) Floor 
D) Collar 
E) None of the above 
A) Swap 
B) Cap 
C) Floor 
D) Collar 
E) None of the above B

Question 4

The exercise price of The American Dairy Company is $17. You purchase the warrants for $4.00 each when American Dairy's stock price is $20.00 a share. Each warrant entitles you to purchase one share of ADC stock. Calculate your percentage gain assuming the warrant premium drops by 50% and you sell your warrants when the stock reaches $30.00 per share.

Accepted Answer

A) 37.5% 
B) 87.5% 
C) 137.5% 
D) 237.5% 
E) 337.5% 
A) 37.5% 
B) 87.5% 
C) 137.5% 
D) 237.5% 
E) 337.5%

Question 5

Exhibit 23.6
USE THE INFORMATION BELOW FOR THE FOLLOWING PROBLEM(S)
BioTech Industries has debentures outstanding (par value $1,000) convertible into the company's common stock at $30. The coupon rate is 11 percent payable semiannually and they mature in 10 years.
-Refer to Exhibit 23.6. Calculate the straight-bond value assuming that bonds of equivalent risk and maturity are yielding 14 percent per year compounded semiannually.

Accepted Answer

A) $757.37 
B) $796.83 
C) $841.07 
D) $889.82 
E) $902.65 
A) $757.37 
B) $796.83 
C) $841.07 
D) $889.82 
E) $902.65

Question 6

Exhibit 23.9
USE THE INFORMATION BELOW FOR THE FOLLOWING PROBLEM(S)
The Skalmory Corporation has entered into a 3-year interest rate swap, with semiannual settlement, to pay a fixed rate of 7.5% per year and receive 6-month LIBOR. The notional principal is $10,000,000.
-Refer to Exhibit 23.9. Assume that one year later the fixed rate on a new 2-year receive fixed pay floating LIBOR swap has fallen to 7% per year. Settlement is on a semiannual basis. Calculate the market value of the FRN based on $100 face value.

Accepted Answer

A) $101.33 
B) $100.58 
C) $100.00 
D) $98.67 
E) $95.83 
A) $101.33 
B) $100.58 
C) $100.00 
D) $98.67 
E) $95.83

Question 7

Suppose a corporation desires to borrow financial capital for six months, with two three-month installments. The firm is concerned that interest rates may rise over this period of time. To eliminate interest rate exposure the firm could acquire a

Accepted Answer

A) 3* 6 Forward Rate Agreement 
B) 3 month "floating-for-fixed" Swap 
C) 3 month Bond-Index Linked Swap 
D) 3 month Warrant 
E) All of the above 
A) 3* 6 Forward Rate Agreement 
B) 3 month "floating-for-fixed" Swap 
C) 3 month Bond-Index Linked Swap 
D) 3 month Warrant 
E) All of the above

Question 8

The conversion parity price is equal to the par value of a convertible bond divided by the number of shares into which it can be converted.

Accepted Answer

A) True 
 B)False

Question 9

Exhibit 23.8
USE THE INFORMATION BELOW FOR THE FOLLOWING PROBLEM(S)
An international investment firm buys an interest rate cap that pays the difference between LIBOR and 6% if LIBOR exceeds 6%. Current LIBOR is 5%. The amount of the option is $1,500,000, and the settlement is every 3 months. Assume a 360 day year.
-Refer to Exhibit 23.8. Find the payoff if LIBOR closes at 6.3%.

Accepted Answer

A) -$45,000 
B) -$11,250 
C) $0 
D) $11,250 
E) $45,000 
A) -$45,000 
B) -$11,250 
C) $0 
D) $11,250 
E) $45,000

Question 10

Risk management strategies involving interest rate agreements can be classified as forward-based or option-based.

Accepted Answer

A) True 
 B)False

Question 11

A floor agreement is a series of cash settlement interest rate options, typically based on LIBOR.

Accepted Answer

A) True 
 B)False

Question 12

Exhibit 23.9
USE THE INFORMATION BELOW FOR THE FOLLOWING PROBLEM(S)
The Skalmory Corporation has entered into a 3-year interest rate swap, with semiannual settlement, to pay a fixed rate of 7.5% per year and receive 6-month LIBOR. The notional principal is $10,000,000.
-Refer to Exhibit 23.9. Assuming that one year after the swap was initiated the fixed rate on a new 2-year receive fixed pay floating LIBOR swap has fallen to 7% per year, calculate the market value of the 7.5% fixed rate bond based on $100 face value. Settlement is on a semiannual basis.

Accepted Answer

A) $101.33 
B) $100.92 
C) $100.00 
D) $98.67 
E) $95.83 
A) $101.33 
B) $100.92 
C) $100.00 
D) $98.67 
E) $95.83

Question 13

Exhibit 23.6
USE THE INFORMATION BELOW FOR THE FOLLOWING PROBLEM(S)
BioTech Industries has debentures outstanding (par value $1,000) convertible into the company's common stock at $30. The coupon rate is 11 percent payable semiannually and they mature in 10 years.
-Refer to Exhibit 23.6. At present, what would be the minimum value of the bond?

Accepted Answer

A) $600.00 
B) $796.83 
C) $889.82 
D) $900.00 
E) $1000.00 
A) $600.00 
B) $796.83 
C) $889.82 
D) $900.00 
E) $1000.00

Question 14

Exhibit 23.7
USE THE INFORMATION BELOW FOR THE FOLLOWING PROBLEM(S)
The WallMal Company has entered into a 4-year interest rate swap, with semiannual settlement, to pay a fixed rate of 8% per year and receive 6-month LIBOR. The notional principal is $50,000,000.
-Refer to Exhibit 23.7. Indicate the market value of the swap to the WallMal Company.

Accepted Answer

A) $5,786,345 
B) -$3,575,987 
C) $1,289,450 
D) -$1,514,900 
E) $1,250,075 
A) $5,786,345 
B) -$3,575,987 
C) $1,289,450 
D) -$1,514,900 
E) $1,250,075

Question 15

Exhibit 23.7
USE THE INFORMATION BELOW FOR THE FOLLOWING PROBLEM(S)
The WallMal Company has entered into a 4-year interest rate swap, with semiannual settlement, to pay a fixed rate of 8% per year and receive 6-month LIBOR. The notional principal is $50,000,000.
-Refer to Exhibit 23.7. Indicate the market value of the swap to the WallMal Company.

Accepted Answer

A) $3,525,120 
B) -$3,500,000 
C) $1,332,150 
D) -$1,332,150 
E) $1,026,600 
A) $3,525,120 
B) -$3,500,000 
C) $1,332,150 
D) -$1,332,150 
E) $1,026,600

Question 16

Exhibit 23.3
USE THE INFORMATION BELOW FOR THE FOLLOWING PROBLEM(S)
Chimichango Industries has decided to borrow $50,000,000.00 for six months in two three-month issues. As the Treasurer, you are concerned that interest rates will rise over the next three months and the rate upon which the second payment will be based will be undesirable. (The amount of Chimichango's first payment will be known at origination.) To reduce the company's interest rate exposure, you decide to purchase a 3 * 6 FRA whereby you pay the dealer's quoted fixed rate of 5.91% in exchange for receiving 3-month LIBOR at the settlement date. In order to hedge her exposure, the dealer buys LIBOR from Megabuks Industries at its bid rate of 5.85%. (Assume a notional principal of $50,000,000.00 and that there are 60 days between month 3 and month 6.)
-Refer to Exhibit 23.3. How much compensation does the dealer receive for transaction costs, credit risk and other costs associated with matching the FRA's?

Accepted Answer

A) $30,000 
B) $31,250 
C) $7,500 
D) $5,000 
E) None of the above 
A) $30,000 
B) $31,250 
C) $7,500 
D) $5,000 
E) None of the above

Question 17

The conversion premium for a convertible bond is calculated as:

Accepted Answer

A) (Market Price + Minimum Value)/Minimum Value. 
B) (Market Price/Minimum Value) * Minimum Value. 
C) (Market Price + Minimum Value) * Minimum Value. 
D) (Market Price - Minimum Value)/Minimum Value. 
E) (Market Price * Minimum Value)/Minimum Value. 
A) (Market Price + Minimum Value)/Minimum Value. 
B) (Market Price/Minimum Value) * Minimum Value. 
C) (Market Price + Minimum Value) * Minimum Value. 
D) (Market Price - Minimum Value)/Minimum Value. 
E) (Market Price * Minimum Value)/Minimum Value.

Question 18

Consider a pension fund manager that wishes to convert $10 million from notes paying LIBOR to stocks, using an equity swap. The equity swap should be structured so that

Accepted Answer

A) Pension fund receives LIBOR and pays an equity return based on notional principal of $5 million. 
B) Pension fund pays LIBOR and receives an equity return based on notional principal of $5 million. 
C) Pension fund receives LIBOR and pays an equity return based on notional principal of $10 million. 
D) Pension fund pays LIBOR and receives an equity return based on notional principal of $10 million. 
E) None of the above. 
A) Pension fund receives LIBOR and pays an equity return based on notional principal of $5 million. 
B) Pension fund pays LIBOR and receives an equity return based on notional principal of $5 million. 
C) Pension fund receives LIBOR and pays an equity return based on notional principal of $10 million. 
D) Pension fund pays LIBOR and receives an equity return based on notional principal of $10 million. 
E) None of the above.

Question 19

Which of the following is not a typical characteristic of a convertible preferred stock?

Accepted Answer

A) They are cumulative but not participating. 
B) The conversion privilege normally expires before maturity. 
C) They have no sinking fund or purchase fund. 
D) They have a fixed conversion rate. 
E) There is generally no waiting period before conversion can take place. 
A) They are cumulative but not participating. 
B) The conversion privilege normally expires before maturity. 
C) They have no sinking fund or purchase fund. 
D) They have a fixed conversion rate. 
E) There is generally no waiting period before conversion can take place.

Question 20

Exhibit 23.10
USE THE INFORMATION BELOW FOR THE FOLLOWING PROBLEM(S)
TexMex Corporation has decided to borrow $50,000,000 for six months in two three-month issues. The corporation is concerned that interest rates will rise over the next three months. Thus, the corporation purchases a 3 * 6 FRA whereby the corporation pays the dealer's quoted fixed rate of 3.5% in exchange for receiving 3-month LIBOR at the settlement date. In order to hedge her exposure, the dealer buys LIBOR from Newport Inc. at its bid rate of 3%. The notional principal is $50,000,000 and that there are 60 days between month 3 and month 6.
-Refer to Exhibit 23.10. Suppose that 3-month LIBOR is 4.00% on the rate determination day, and the contract specified settlement in advance, describe the transaction that occurs between the dealer and Newport.

Accepted Answer

A) The dealer is obligated to pay Newport $123,762. 
B) The dealer is obligated to pay Newport $125,000. 
C) Newport is obligated to pay the dealer $125,000. 
D) Newport is obligated to pay the dealer $123,762. 
E) None of the above 
A) The dealer is obligated to pay Newport $123,762. 
B) The dealer is obligated to pay Newport $125,000. 
C) Newport is obligated to pay the dealer $125,000. 
D) Newport is obligated to pay the dealer $123,762. 
E) None of the above

In convertible bonds, the value of the common stock price upon immediate conversion is the

In an interest rate swap, the fixed rate payer profits if interest rates fall.

The writer of a ____ agreement makes settlement payments when LIBOR is greater than the striking rate of the agreement.

Suppose a corporation desires to borrow financial capital for six months, with two three-month installments. The firm is concerned that interest rates may rise over this period of time. To eliminate interest rate exposure the firm could acquire a

The conversion parity price is equal to the par value of a convertible bond divided by the number of shares into which it can be converted.

Risk management strategies involving interest rate agreements can be classified as forward-based or option-based.

A floor agreement is a series of cash settlement interest rate options, typically based on LIBOR.

The conversion premium for a convertible bond is calculated as:

Consider a pension fund manager that wishes to convert $10 million from notes paying LIBOR to stocks, using an equity swap. The equity swap should be structured so that

Which of the following is not a typical characteristic of a convertible preferred stock?

The Investment Setting

The Asset Allocation Decision

Selecting Investments in a Global Market

Organization and Functioning of Securities Markets

Security-Market Indexes

Efficient Capital Markets

An Introduction to Portfolio Management

An Introduction to Asset Pricing Models

Multifactor Models of Risk and Return

Analysis of Financial Statements

Introduction to Security Valuation

Macroanalysis and Microvaluation of the Stock Market

Industry Analysis

Company Analysis and Stock Valuation

Technical Analysis

Equity Portfolio Management Strategies

Bond Fundamentals

The Analysis and Valuation of Bonds

Bond Portfolio Management Strategies

An Introduction to Derivative Markets and Securities

Forward and Futures Contracts

Option Contracts

Professional Money Management, Alternative Assets, and Industry Ethics

Evaluation of Portfolio Performance

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Exam 23: Swap Contracts, Convertible Securities, and Other Embedded Derivatives

In convertible bonds, the value of the common stock price upon immediate conversion is the

In an interest rate swap, the fixed rate payer profits if interest rates fall.

The writer of a ____ agreement makes settlement payments when LIBOR is greater than the striking rate of the agreement.

Suppose a corporation desires to borrow financial capital for six months, with two three-month installments. The firm is concerned that interest rates may rise over this period of time. To eliminate interest rate exposure the firm could acquire a

The conversion parity price is equal to the par value of a convertible bond divided by the number of shares into which it can be converted.

Risk management strategies involving interest rate agreements can be classified as forward-based or option-based.

A floor agreement is a series of cash settlement interest rate options, typically based on LIBOR.

The conversion premium for a convertible bond is calculated as:

Consider a pension fund manager that wishes to convert $10 million from notes paying LIBOR to stocks, using an equity swap. The equity swap should be structured so that

Which of the following is not a typical characteristic of a convertible preferred stock?

The Investment Setting

The Asset Allocation Decision

Selecting Investments in a Global Market

Organization and Functioning of Securities Markets

Security-Market Indexes

Efficient Capital Markets

An Introduction to Portfolio Management

An Introduction to Asset Pricing Models

Multifactor Models of Risk and Return

Analysis of Financial Statements

Introduction to Security Valuation

Macroanalysis and Microvaluation of the Stock Market

Industry Analysis

Company Analysis and Stock Valuation

Technical Analysis

Equity Portfolio Management Strategies

Bond Fundamentals

The Analysis and Valuation of Bonds

Bond Portfolio Management Strategies

An Introduction to Derivative Markets and Securities

Forward and Futures Contracts

Option Contracts

Professional Money Management, Alternative Assets, and Industry Ethics

Evaluation of Portfolio Performance

Filters